Meta

My readers often get into trouble dealing with transactions that are unfamiliar to them. Later, they’re keen to save others from making the same mistakes.

Sue and her husband checked their credit scores at Equifax, but didn’t find them as high as expected. They learned that if you cancel a credit card, make sure to let the credit bureaus know.

Gord paid off his mortgage as quickly as he could, but was hit with a big penalty. He now knows there’s an annual limit on what you can prepay and you don’t get a warning when you go over the limit.

Stan opened a margin account to trade stocks, but paid more interest than anticipated. He discovered that if you hold Canadian and U.S. stocks in the same account, the margin is kept completely separate.

Things are more complex than they used to be. So, read the tips from Sue, Gord and Stan below and thank them for trying to help you avoid costly errors.

11 comments

I want to share a recent experience we had with Equifax and our credit card companies.

Our credit scores should have been near-perfect. We discharged our mortgage two years ago, paid off our car loan 9 years ago (it still runs great) and always pay our bills in full on the day they arrive. We live well within our modest means on one income.

However, when we went online with Equifax recently, my husband and I were dismayed to see that our FICO scores were not perfect at all: (783 him / 839 me).

Not bad scores, I know. But they should have been better. Here’s why.

What we did wrong was to change credit cards quite a few times over the past 10 years, chasing better air miles deals or in-store promotions.

Many of these old cards remained on our reports, even though they were cancelled by us (using the phone) years ago. More available credit equals a lower FICO score.

We also foolishly allowed the 3 cards we do use to keep bumping up our credit limits, way beyond what we need or would ever use. We took care of that immediately.

Now that some home insurance companies are basing premiums on FICO scores, you might want to reinforce with your readers that they should stay on top of their credit card “comings and goings.”

They should write to Equifax and TransUnion when they close any credit card accounts, with a copy of a confirming letter from the card issuer attached.

We found out the hard way that you can’t trust the card issuers to notify the credit bureaus about cards that were cancelled voluntarily and cut up years ago.

(Royal Bank Visa was the only exception. TD Visa let it drag on for 6 years until we caught it. HBC insisted they sent Equifax the information years ago, but were glad to send another letter.)

I just spent 17 days gathering up 6 letters from various credit card issuers to confirm that the accounts are closed.

Only HBC admitted the account was closed 6 years ago in their recent letter. All the other letters dated the account closure on the day they wrote the letter. This was false, but good enough for our purposes, I suppose.

It took another two hours to copy and put all this information together for Equifax. Quite the hassle, but hopefully worth doing.

I’m waiting for our free reports from TransUnion – I’ll need a couple of weeks to build up the strength to go through all of it again.

I found myself in a position where I had the funds to pay off a substantial mortgage with Bank of Nova Scotia.

Online, I made the largest annual lump-sum payments (15%) I could make. I also found online that I was able to increase my weekly payments by 15% and indeed, I was able to continue to increase that payment on a daily basis.

Itâ€™s important to note that for lump-sum payments you are clearly told online what amounts you can pay without penalty. No such reference is made when increasing weekly payments by 15%.

So it appeared to me that I was able to simply increase those weekly payments until the point where my mortgage was nearly paid off.

Imagine my shock, when as the mortgage balance approached zero, I was told by my bank contact that there would be an interest rate differential penalty of more than $18K.

The conspiratorial side of me believes the bank would love to encourage individuals to increase payments online so they can collect obscene penalties down the road.

I am at a loss on what to do. The bank seems fairly entrenched that theyâ€™re not prepared to bend at all for my long-term business.

Iâ€™m sure many will say this is a case of buyer beware and I should have done more due diligence with my mortgage contract (which, for itâ€™s worth, the bank never provided me with a copy of upon closing).

But this seems to me to be yet another example of the complete lack of transparency the banks have with regards to mortgage contracts, as youâ€™ve written about in the past.

I appealed the penalty and the bank reduced it to $11,214. That’s because interest rates had risen since March 1, when the $18,764 penalty was calculated.

Now I realize that I didnâ€™t understand the prepayment limits. I thought I had three options that could each be maximized in a year â€“ lump sum, individual payment amount and doubling up of payments.

The bank’s website clearly tells you a penalty will be incurred if you exceed your lump sum payment maximum. I thought they would also tell you if penalties applied when increasing weekly payments.

I opened a direct investing account (margin account) with RBC about a year ago, initially using credit line funds.

After a trial period, I transferred $70k from a managed fund (TD Waterhouse) into my RBC Direct Investment account.

At the time of opening the original account, I was advised, online, that I was required to open a US Investment Account, if I wanted to trade stock listed on US exchanges, which I did.

I have only ONE margin account with them, with one account number. But it’s split, for investment purposes, into a Canadian fund and a US fund. The $70 k that was transferred from TD was directed into my ONE margin account.

Over the past 6 months, I have gradually invested all of the $70k, plus most of the available ‘margin’ in US listed stocks, so that I now hold approximately $100 k of varied US stocks (book value). The margin allowed appears to be about 40-50%.

Upon reviewing my investment statements last week online, I was shocked to see that I have been charged monthly interest on margin balances of between $80 & $100k from last November to the current month!!

The Royal Bank is telling me that, because I am using my US margin account, I am liable for interest on the total value of my US investments, all of which they claim is the ‘margin balance’.

The $70k on deposit has been applied to my Canadian account, which has been inactive, but still deposited to my only RBC Direct Investing Account.

At no time did RBC ever inform me (with the possible exception of some ‘fine print’ contract language, which I have yet to find) that it was necessary for me to transfer funds from the Canadian side to the US side of my account!!

I find this ludicrous, if not fraudulent.

They, or any other on-line investment bank, would NEVER extend a ‘margin’ of $100 k with a personal investment of $70 k……..what entitles them to think that they can therefore charge me interest on that amount?

I am hoping that this makes some sense to you and that you can perhaps share this dilemma with other unsuspecting investors.

Thank you for bringing Stan’s issue to our attention. Hopefully this will clarify your questions.

Upon opening a margin account, every RBC Direct Investing client must sign a margin account agreement, which outlines all of the details on how a margin account works.

Below is a summary of the disclosures that a client receives regarding our margin policy and debit interest.

The debit interest against the US side of an account is standard industry practice.

The client would have also received monthly statements that would have included the interest charges. It is also clearly outlined on monthly statements that clients should notify us of any concerns about their statements within 45 days of receipt.

Disclosures to the client regarding margin policy and debit interest:

When determining whether an account is in a position of margin excess (“House excess”) or margin call (“House call”), we examine the holdings and cash balances of the CAD and USD sides of the account.

Further to the above, if a client is carrying a debit on the USD side, we would not automatically convert the CAD funds into USD funds because we do not know if the client is speculating on the direction of the CAD dollar.

For example, if a client is expecting that the CAD dollar will appreciate in value, he/she may want to wait for a more favourable exchange rate before converting the CAD funds into USD funds.

I expressly acknowledge, agree to and ratify the terms and conditions of an Operation of Account Agreement governing the Accounts which agreement was provided to me upon opening my account . . .

Operation of Account Agreement, Section 1. General:

In this agreement . . . This agreement explains how your cash account works as well as how additional optional services such as margin and Automated Services work.

Section 19. Interest:

We will deduct from your account any interest you owe us. Our rate of interest will be the rate shown on your monthly or quarterly statement. We may change the interest rate at
any time.

We do not pay interest on credit balances below certain amounts. Our current interest rates and the minimum credit balance required to earn interest is available upon request or on our website at http://www.rbcdirectinvesting.com.

If I understand correctly, Stan opened a *margin* account (as opposed to a *cash* account) with RBC and transferred $70,000 CAD.

He then purchased $100,000 worth of US securities, but did not transfer cash from his Canadian account to US account. RBC charged him interest on the $100,000 margin, but probably paid peanuts on the $70,000 cash portion.

This is standard practice among all brokerages and there is a very good reason behind it. By keeping CAD and USD accounts separately, brokers avoid converting currency from USD to CAD and back again when a client buys and sells US stocks.

In Stanâ€™s case, if RBC had automatically converted currency, he would have incurred a 1.5% hit on the currency conversion while he may have been in the process of transferring USD cash from an external account.

I donâ€™t find this ludicrous, let alone fraudulent. In fact, I find it ludicrous that brokerages allow CAD-only RRSP accounts, forcing clients to pay unnecessary currency conversion fees and RBC, to its credit, is planning on allowing USD RRSP account in the near future.

It is hard for me to agree with Stan that RBC Direct did not provide enough disclosure and is somehow at fault here. The margin agreement terms clearly state that USD and CAD accounts are treated separately.

The agreement also outlines why this is so. It is hard to argue that RBC Direct put in this rule simply to line its pockets when there is a clear benefit to clients wanting to avoid currency conversions.

DIY investors opting for a self-directed discount brokerage account are taking on responsibility to stay on top of their investments. That includes everything from learning how to operate their accounts to monitoring them for any discrepancies.

I do feel Stan’s pain — paying interest unnecessarily on a large loan definitely stings — but I also think it was Stan’s responsibility to keep on top of his account, at
least initially when he was learning the ropes.

After all, the only person monitoring a self-directed acount is the investor himself.

Perhaps, this is a good idea for a column on how separate USD-CAD accounts can trap the unwary investor into buying stocks on margin.

I agree that the ultimate responsibility for understanding my investment account is entirely my own.

Canadian Capitalist is obviously well-versed in the investment field and is aware of practices that the novice investor is not.

However, RBC Direct (and others) were not implemented to serve the knowledgeable investor, in my opinion. And, in spite of his claim that ‘sufficient disclosure’ of the application of margin funds to CDN or US accounts and resultant interest is made by RBC, it has yet to ‘jump off of the page’ for me.

In fact, as I read Art. 23 – Foreign Exchange – of the Operation Account Agreement (provided by Matt), it could be argued that ‘indirect requests’ for conversion of funds between USD & CDN$ are made every time a transaction is made in my account.

Could Matt kindly direct me to the pertinent article or articles of the various agreements that represent ‘sufficient disclosure’ of the issue at hand?

I’m looking for a CLEAR direction that CDN funds deposited into a direct investment account will ONLY be converted to US funds on request and that I will be reponsible for interest costs on the entire US account side if I fail to do so.

I recently cancelled one of my credit cards and wanted to make sure it was properly reflected on my credit report. Equifax has this automated service and they don’t have a real person helping consumers.

I had to enter my SIN and some other details for verification, but their system doesn’t like my postal code. So they won’t allow me to access my credit report.

When you apply for credit, the SIN number is enough to pull the credit file. It’s funny Equifax does not realize it. (OK, I get it. They don’t want a third party to access your file…but their solution is so childish.)

If you want to feel my pain, you might want to go to their site and call the number they posted online.

They make so much money out of Canadians and Canadian businesses and they should provide a reasonable service. Equifax, please have a “live person” at least during business hours to help out the consumers.

My classmate works for a major bank and his clients faced the same issue, I heard. Believe me…the bank didn’t do anything about it, as far as he knows. It’s all about money…never about customer satisfaction.

While Stan may have been caught flat-footed by the margin rules at RBC and inadvertently speculated on the CAD, it looks to have worked out for him: the CAD is up 5-6% in the last 6 months, which should more than offset any margin interest owing.

My understanding of credit score is that the amount of credit you utilize out of the total credit you’ve been offered is more important to lenders. Therefore, closing credit cards can adversely affect your credit score.

For example, if you had $10,000 of credit and used only $1,000, that’s a 10% utilization. If you close two credit cards, let’s say with a total of $5,000 of credit, then your utilization increase to 20%! Therefore, having a higher credit limit would also help reduce your utilization percentage.

One other point – credit history is important as well. The longer you’ve had a credit card, or other type of loan, and paid it off on time, the better it is for your score.

Sue:
You have to be kidding me! You’re complaining about a credit score of 839?? What are you looking for? The impossibly perfect score of 900 that no one gets? With your paltry 839, you only get the best rates and any credit you want. What else do you need?